Cash to avoid estate tax

J

Joylush

Recycles dryer sheets
Joined
Jun 21, 2015
Messages
350
Thanks for the clarification and ideas.
 
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Options to defraud the government?

Unless it's stuffing the mattress the government knows about it anyway.

And even then the lawful thing is to report it.
 
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RockyMtn said:
And why do you believe that cash wouldn't be considered part of the estate? ...
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Yes, the OP isn't adding up for me. Did you mean something else? Did you leave out some information?

Estate tax is on the entire estate. House, cars, collectibles, investments, cash - the form doesn't matter. Probably the value of outstanding loans as well.

Please clarify.

Also, Federal Estate tax doesn't kick in until $5,490,000, and currently increases with inflation. If I hit that level, I'm pretty sure I'd just start giving it away to friends/family/charity. I'm already plenty comfy well below that, if that amount isn't enough cushion for me, I guess no amount would be.

-ERD50
 
The Unified Tax Credit Amount, the amount of the estate before federal estate taxes are owed is 5.49 million for 2017. That's a large chunk before anyone has to worry about it.

However, state level estate taxes are are different for each state.
 
sheehs1 said:
The Unified Tax Credit Amount, the amount of the estate before federal estate taxes are owed is 5.49 million for 2017. ...
Click to expand...

And if married couple, you have portability, so double that before worrying about how to best structure estate/life/trusts to legally avoid the tax.
 
ERD50 said:
Yes, the OP isn't adding up for me. Did you mean something else? Did you leave out some information?

Estate tax is on the entire estate. House, cars, collectibles, investments, cash - the form doesn't matter. Probably the value of outstanding loans as well.

Please clarify.

Also, Federal Estate tax doesn't kick in until $5,490,000, and currently increases with inflation. If I hit that level, I'm pretty sure I'd just start giving it away to friends/family/charity. I'm already plenty comfy well below that, if that amount isn't enough cushion for me, I guess no amount would be.

-ERD50
Click to expand...

I guess that would depend on what age you were. I'm not keen on paying an extra 40% on my life's earnings no matter what the amount. It seems punitive. Then again, you're dead.
 
I don't know the legal status of a two-party checking account when it comes to total estate, but that might work to pass some money (legally). Never really thought about it before. With current limits, I'm not too worried about it either. YMMV
 
The laws may change and you may find other issues.
but why not gift it early or move it to an irrevocable trust ... thus out of you estate.
If you really want to move it out of the estate, create a life insurance trust and use that as a means to move assets.
 
Joylush said:
I guess that would depend on what age you were. I'm not keen on paying an extra 40% on my life's earnings no matter what the amount. It seems punitive. Then again, you're dead.
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I understand, it was more just to verify you knew the limits had been raised (they had been ~ $600,000 a while back). Even a $5M limit can be a problem if that's tied up in a business. Someone may want to hand that business down in the family, but a $20M business may really only provide enough profit for a few family members, but a 40% hit on ~ $15M could be unsustainable.

But I don't think a cash account is going to do it for you. Study up and hire a pro if you think it would help, but I think most of the 'fixes' do more for the lawyers and accountants and insurance/annuity sales people than it will do for you and your heirs.

You can give $14,000 per person annually to any individual with no tax reporting or taxes due, and if you have a spouse, you can each give $14,000. You could distribute $200,000 pretty quickly that way.

-ERD50
 
There are legal ways to minimize estate tax...

Keeping your assets in cash is either going to still be taxed, or cause your heirs to break the law by hiding assets. Do you really want to encourage your heirs to break the law and risk penalties, fines, and possible jail time? Presumably they're already inheriting >$5M tax free...

See an estate attorney on ways to minimize the taxes (through trusts, charitible trusts, etc.)
 
Step up your gifting programs. $14k a year, per person, can add up quickly.
 
Koolau said:
I don't know the legal status of a two-party checking account when it comes to total estate, but that might work to pass some money (legally). Never really thought about it before. With current limits, I'm not too worried about it either. YMMV
Click to expand...

If there is more than one name on a bank account, technically if one dies then the survivors own the account. That can play in other ways too though, if any one of the owners is in litigation, the entire account can be at risk. pick your poison... carefully.
 
pb4uski said:
If there is more than one name on a bank account, technically if one dies then the survivors own the account. That can play in other ways too though, if any one of the owners is in litigation, the entire account can be at risk. pick your poison... carefully.
Click to expand...

when you add someone as jwros, you have made a gift which may require a gift tax return depending upon value.
 
pb4uski said:
If there is more than one name on a bank account, technically if one dies then the survivors own the account. That can play in other ways too though, if any one of the owners is in litigation, the entire account can be at risk. pick your poison... carefully.
Click to expand...

I think it also depends on if one lives in a community property state or not. Idaho is a community property state, and when my Mom passed away last year, half of their joint checking account was included in her estate valuation.

I have no idea what happens if the account owners live in different states and one is community property and the other isn't.

Also, "cash on hand" was asked about and dutifully included in her estate as well, so to the OP, any cash in the mattress does not escape being included for estate tax purposes (unless you commit tax fraud, never advisable).

@2017ish, the law does allow portability, but everyone should know that in order to utilize double the estate tax exemption, you do need to elect it by filing a timely estate tax return *and* electing the portability option (google DSUEA if your interested) - it is not automatic. Also getting remarried affects things... :cool:

Finally, if one has grandchildren with 529 plans, one can contribute up to 5 years worth of gifting all at once which moves it out of the estate once the contribution has been made. Depending on the number of grandkids, that could be a lot of money.
 
What if you have a whole life insurance policy and your heirs are the beneficiaries? Is the death benefit part of the estate? I don't know the answer, but I'll bet someone here does.
 
bingybear said:
when you add someone as jwros, you have made a gift which may require a gift tax return depending upon value.
Click to expand...

Ahhh, I figured there had to be a catch. That just seemed like too easy of a way to skirt the Estate Tax issue. Plus, I never heard of it, but lawyers, and annuity/insurance sale people couldn't make much $ from a simple plan like that.


-ERD50
 
Gumby said:
What if you have a whole life insurance policy and your heirs are the beneficiaries? Is the death benefit part of the estate? I don't know the answer, but I'll bet someone here does.
Click to expand...

If structured correctly, it can be done.

From what I understand, the normal way to do this is the owner of the policy (and beneficiaries, of course) should all be outside of the estate. Then the estate 'gifts' the beneficiaries, which can then use the money to pay the premiums. If the people inside the estate pay the premiums directly, it doesn't pass muster.

And the beneficiaries can't be 'forced' to pay the premiums, or it isn't a 'gift'.

But those pesky premiums! So if you sort that out, it still amounts to a bet with the insurance company. After all (and the insurance people never mention this), the 'gifting' alone gets the money out of the estate. So it boils down to whether an ins policy is a good investment or not, and most people would say "No".

Sometimes the policy is used to provide liquidity at death, so money is available to pay the estate tax when the estate itself isn't easily liquidated (real estate, a business, etc). But there might be better ways to gain liquidity.

-ERD50
 
ERD50 said:
If structured correctly, it can be done.

From what I understand, the normal way to do this is the owner of the policy (and beneficiaries, of course) should all be outside of the estate. Then the estate 'gifts' the beneficiaries, which can then use the money to pay the premiums. If the people inside the estate pay the premiums directly, it doesn't pass muster.

And the beneficiaries can't be 'forced' to pay the premiums, or it isn't a 'gift'.

But those pesky premiums! So if you sort that out, it still amounts to a bet with the insurance company. After all (and the insurance people never mention this), the 'gifting' alone gets the money out of the estate. So it boils down to whether an ins policy is a good investment or not, and most people would say "No".

Sometimes the policy is used to provide liquidity at death, so money is available to pay the estate tax when the estate itself isn't easily liquidated (real estate, a business, etc). But there might be better ways to gain liquidity.

-ERD50
Click to expand...

you don't need to do all the gifting to and so on. Just set up a life insurance trust and fund the trust to buy the insurance in a lump sum. This is irrevocable. The trust owns the insurance and the grantor does not control it. So it is not in the estate. I've heard cases where the trust can also be the beneficiary that then distributes to the heirs. Otherwise it could just have the heirs as beneficiaries. This way to don't have don't have to worry about some outside owner running into financial issues and terminating the policy.
 
bingybear said:
when you add someone as jwros, you have made a gift which may require a gift tax return depending upon value.
Click to expand...

Creating Joint Ownership: Avoiding the Tax Traps and Other Pitfalls

seems to depend on the asset type.

"WHEN DOES THE GIFT TAX APPLY ?
Treas. Reg. § 25.2511-1(h)(4) spells it out clearly: With bank accounts and most brokerage accounts that call for the registration of securities in “street name,” Dad will not have made a reportable gift if he simply adds Junior’s name as a joint owner. Reportable gift transfers occur only if Junior starts to draw funds from those accounts for his personal use (Revenue Ruling 69-148). But with other assets, including a business or even a personal residence, if Dad makes Junior a joint owner, a gift will be deemed to have occurred immediately, and a gift return will probably have to be filed for the year the joint tenancy was created (Treas. Reg. § 25.2511-1(h)(5)).

- See more at: http://www.journalofaccountancy.com/issues/2009/feb/creatingjointownership.html#sthash.R6fU54rD.dpuf"
 
bingybear said:
you don't need to do all the gifting to and so on. Just set up a life insurance trust and fund the trust to buy the insurance in a lump sum. This is irrevocable. The trust owns the insurance and the grantor does not control it. So it is not in the estate. I've heard cases where the trust can also be the beneficiary that then distributes to the heirs. Otherwise it could just have the heirs as beneficiaries. This way to don't have don't have to worry about some outside owner running into financial issues and terminating the policy.
Click to expand...

That sounds like a pretty good and, more importantly, legal way to accomplished what the OP had in mind.
 
bingybear said:
you don't need to do all the gifting to and so on. Just set up a life insurance trust and fund the trust to buy the insurance in a lump sum. This is irrevocable. ...
Click to expand...

I think you are correct - they key is that it must be irrevocable (which is OK if that is understood), then the 'gift' issue doesn't apply, since the estate has zero control at that point.

But it still seems like the insurance is superfluous. You could just put $X in the trust, right? OK, you have access to your money longer, and I suppose you could just stop paying premiums and accept the insurance value at that point? So maybe more flexible?

Plus some administration costs for the trust, but probably pretty small?

-ERD50
 
ERD50 said:
I think you are correct - they key is that it must be irrevocable (which is OK if that is understood), then the 'gift' issue doesn't apply, since the estate has zero control at that point.

But it still seems like the insurance is superfluous. You could just put $X in the trust, right? OK, you have access to your money longer, and I suppose you could just stop paying premiums and accept the insurance value at that point? So maybe more flexible?

Plus some administration costs for the trust, but probably pretty small?

-ERD50
Click to expand...

a life insurance trust is a common method of setting up some inheritance. If you moved a large chunk $ into an irrevocable trust and had it invested you could like do some of the same stuff. Expenses of the trust might be higher as you've added someone doing the investing. You likely don't want to distribute assets while the grantor is alive, thus likely some trust taxes as well. Likely a likely a single premium life insurance policy won't be kicking out earnings which may remove the need for paying trust taxes.

Recent personal experience has me doubting that I can really script a long term trust to do what I want decades down the road. Some family members did a set of trusts. Now that one is irrevocable, the surviving spouse has determined that what is doing is not what they now want. Too late. Moral -- be careful what you put into a trust. Update as needed.

I'm going to revise ours in the near future.

If your going to create an irrevocable trust... get it right the first time.
 
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